Canadian Mortgage Holders See Credit Improve, But It Doesn’t Mean What You Think

Canadian real estate owners with a mortgage are doing “very good” with their payments. The Canada Mortgage and Housing Corporation (CMHC), using Equifax data, is observing credit score improvements across the country. The average credit score of Canadian mortgage holders is improving. This may come as a surprise to some, but it doesn’t mean what most people think it does.

A Quick Overview Of Credit Scores

Credit scores are a quick way for lenders to view a quantified version of borrower risk. The higher the score, the lower the chance of finding a borrower that will default on debt in theory. A poor quality credit score is below 620, which means you have little to no credit history, or suck at paying bills. The average score is between 620 and 679, which is the average of everyone – not just homeowners. Good is 680 to 719, very good is between 720 to 779, and excellent is above 780. Once you’re in “good” territory, you’re less likely to be denied a loan. Higher credit scores can save people cash on interest payments though.

Higher credit scores are indicative of a borrower’s risk under regular circumstances. That is, in a non-recessionary environment, without a significant correction to home prices. The Great Recession saw those with excellent credit default at a higher rate than “poor” folks. Actually, the surge in US defaults was exclusive to investors with excellent credit. We know, it’s not as fun as blaming poor people and immigrants for all of society’s problems. The point is, excellent credit in a liquidity event doesn’t lower defaults… despite what the old white dudes that typically cause a liquidity crisis tell everyone.

Toronto Real Estate

Credit scores of mortgage holders across Greater Toronto are improving. Toronto’s average Equifax score for mortgage holders was 775 in Q1 2018, up 10 points over the past 5 years. To contrast, Ottawa hit 770, up 5 points over the same period. Hamilton was 772, up 14 points over the same period. The increase in Toronto is pretty much inline with the rest of the province’s major real estate markets.

Canadian homeowners with a mortgage are seeing improvements in their credit score. Almost all large cities have an average of “very good,” and most have seen improvements over the past 5 years. Of course, this is one of those trends that aren’t all that useful, much like mortgage defaults. Loans to people with high scores only perform under normal circumstances. Are home prices across the country rising by nearly 50% over the past 5 years normal circumstances?